When to exercise stock options: What to consider before you decide
18 min
San Francisco native (yes, really). @uw and Lowell High alum. I like to nerd out on fintech, stock options and taxes.
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San Francisco native (yes, really). @uw and Lowell High alum. I like to nerd out on fintech, stock options and taxes.
Exercising your stock options is easy to put off.
It’s understandable to keep delaying, because there are so many variables in figuring out when to exercise stock options:
While there’s no universal best time to exercise, but you’re in the right place to learn more about what could work for you. And in some cases you don’t need a bunch of cash or to risk your personal assets, because solutions like non-recourse financing could help you exercise your options without risking personal assets.
We’ve pulled together the basics and possible next steps to help you get started:
Note: Secfi’s AI equity assistant, Maeve, can use your equity and tax information to help you estimate costs and compare different exercise scenarios.
Many employees get stock options when joining a company, and the details get fuzzy when looking back. It sounds basic, but it’s worth digging up your grant documents or opening up your portal like Shareworks or Carta. Double check:
The type of stock options you hold impacts how exercising may be taxed. You might have:
We’ve seen people miss out on the opportunity to exercise because they forgot to check the expiration dates on their grant documents.
Leaving your company can also create a much shorter post-termination exercise window. Confirm the exact deadline in your equity documents instead of assuming you’ll have 90 days.
Some companies let employees exercise options before they vest. This can potentially reduce taxes, but it also means paying for shares before you fully earn them, and may require filing an 83(b) election within a strict deadline.
Also check:
Because it can be overwhelming and easy to miss important variables, we suggest trying our free AI equity assistant Maeve when going through the factors that impact the best time to exercise.
It can help you consider all of the below variables and more, because it was designed to help startup employees model different equity scenarios.
Taxes can make exercising far more expensive than you’d expect from just looking at your strike price. We call it the “surprise factor”, because it’s a big surprise when you exercise $70,000 in options and find out you suddenly have to pay over $500,000 in taxes.
Now, this is an extreme example, but there’s really no upper limit to what you might owe.
For illustrative purposes only. Actual results may vary and there is no guarantee of any particular outcome.
More commonly, we see around twice the strike price in taxes. If you exercised $50,000 in shares and have to pay $100,000 in taxes the same year, this can feel expensive. Especially when you consider you can’t easily sell them to help cover the tax expense. We write more about it here: The surprise factor: Why exercising your stock options can be far more expensive than you expect.
Essentially, if you want to exercise stock options, be ready to pay for the cost of exercising as well as the potential taxes.
Earlier-stage companies may have lower strike prices and 409A valuations, which can make exercising less expensive. But they’re also more likely to fail, take longer to reach liquidity, or never provide an exit, so you have a greater chance of losing the money you put in.
Later-stage companies may offer more evidence of growth and a clearer path to an IPO, acquisition, tender offer, or secondary sale, but exercising may already be much more expensive, including a higher tax bill.
Consider the company’s growth, funding, financial performance, and realistic exit potential. Treat office rumours as a starting point, then verify whatever you can. No exit is guaranteed, even at a well-known late-stage company.
Waiting until the company is public can reduce uncertainty. And it may make a cashless exercise possible once you’re allowed to sell the shares, although the potential tax cost could be higher.
Your employment status directly controls your exercise deadline, not just your strategy. If you're planning to wait for an IPO or a cashless exercise, that plan only holds up if you're still employed when it happens.
Leaving voluntarily, getting laid off, or being terminated usually triggers a shortened post-termination exercise window, often far sooner than you'd expect. If your options expire before that liquidity event arrives, waiting cost you the options entirely.
That's why it's worth deciding on an exercise approach before you're facing a departure. Once you're mid-transition, you're making a rushed decision instead of a planned one, often with a tax bill attached.
Consider how the cost would affect your emergency savings, debt, investments, and major financial goals.
Your salary already ties a chunk of your finances to this one company. Exercising adds to that concentration, because you're converting cash you already have into shares in the same private, illiquid company you depend on for income.
Not exercising doesn't cost you money you've already spent, since you haven't paid anything yet. It's a decision to leave potential upside on the table if the company succeeds, not a loss.
Exercising is the opposite trade: you're committing new cash today for a return that could take years to materialize, or never arrive at all. Even if you can afford it and feel good about the company's prospects, that doesn't automatically mean it's the right amount to commit given everything else in your financial plan.
You may want to exercise, but don’t have enough cash or risk appetite. Loans can be an option in this case. Traditional loans can involve monthly repayments or put other assets at risk if you’re not able to pay back the full amount.
Non-recourse financing may cover the strike price and potential taxes, with repayment tied to a future liquidity event and no claim on your other personal assets.
Financing isn’t available for every company or employee, and it doesn’t automatically make exercising the best choice for your situation. But many startup employees don’t realize it can be an option, so it’s worth investigating.
If you’ve already considered the above variables, you’re ahead of the game. Now it’s time to put that information into practice.
Start with the basic purchase cost: multiply your strike price by the number of options you’re considering exercising.
Then estimate the potential federal and state taxes based on your option type (exercising and holding ISOs can trigger AMT; exercising NSOs generally creates ordinary income).
Don’t assume any tax withheld by your employer will cover your full liability. Include a cash buffer in case the final tax bill differs from the estimate.
Maeve can use your grant and tax information to estimate the total cost, including potential taxes, rather than showing you the strike-price cost alone. In fact, it’s useful for every step in this process, because we built it for these exact situations.
Early exercise may reduce the taxable difference and start the ISO holding period sooner, but it also puts your money at risk for longer.
Waiting can be a valid strategy. It preserves cash and can give you more information about the company. But exercising later may become more expensive, and a departure or layoff could shorten your timeline. Just make sure waiting is a strategic choice based on the trade-offs, instead of a decision you keep postponing because it feels complicated.
Exercising doesn’t need to be an all-or-nothing decision. There are many routes you could take, including exercising some now and waiting on the rest. You could also:
Set a personal cash limit and exercise only what fits within it
Estimate how many ISOs you could exercise before triggering AMT, and only exercise that amount
Set an annual amount to exercise based on your vesting schedule, and revisit it annually to make sure it still fits in your goals
Decide not to exercise if the potential return doesn’t justify the cost and risk
| Approach | Potential advantages | Potential drawbacks | May suit someone who… |
|---|---|---|---|
Exercise now | May reduce the taxable difference if the 409A valuation is still low; starts the ISO holding period sooner | Requires cash sooner; increases exposure to an illiquid private company; the shares may never become liquid | Can comfortably cover the cost, understands the risks, and has confidence in the company |
Exercise in stages | Spreads the cost and risk over time; preserves more cash; may help manage potential taxes | Later exercises may cost more if the 409A valuation rises; requires ongoing planning | Wants to begin exercising without committing to the full grant |
Wait | Preserves cash; reduces how long money is tied up; may allow a tender offer, secondary sale, or cashless exercise later | The 409A valuation and potential tax bill may rise; leaving or being laid off could shorten the exercise window | Isn’t comfortable with the current cost or risk, or expects a realistic liquidity opportunity |
Consider whether spending your money on exercising would:
Reduce your emergency savings below a comfortable level
Delay paying off high-interest debt
Interfere with near-term priorities such as buying a home or taking a career break
Leave too much of your income and net worth dependent on one company
Compare the proposed exercise with other uses for the money. For example, would putting $50,000 into one private company make sense for your financial plan, compared with investing that amount across a diversified portfolio?
Ask whether you could handle losing the full amount committed. Private shares may remain illiquid for years and could ultimately be worth less than expected, or nothing at all.
Possible routes include:
Personal savings
Selling other investments
Traditional borrowing from a bank
A combination of personal cash and financing
Waiting for a liquidity event and possible cashless exercise
Borrowing from friends or family
Compare the impact of each route on your monthly cash flow, personal assets, potential upside, and overall risk. For example, traditional borrowing may increase your debt-to-income ratio, which could affect your ability to qualify for a mortgage or other credit.
You can also use a combination of payment methods in some cases.
As an example, you may be comfortable investing $50,000 of your own cash but face a $200,000 total exercise cost. Depending on eligibility, you could use personal cash for part and non-recourse financing for the remaining $150,000. But of course, always check with a tax professional before making major decisions.
Secfi helps you understand and act on your equity decisions. Since 2017, we’ve helped over 55,000 startup executives and employees model their equity. It’s personal to us; our founders had to walk away from equity at their former companies because they couldn’t afford the cost.
Here’s why people at companies like Uber, Anthropic, and Pinterest choose Secfi:
We built Maeve specifically to answer equity questions for startup employees and executives. It’s based on years of proprietary research and calculators we developed at Secfi, now available all in one place with our AI equity assistant. You can fact-check its assumptions, which can be helpful compared to fragmented online equity tools or LLM responses, which can be hard to follow and check their calculations.
To make it easy to get started, you can link Maeve directly to Carta in seconds. Or if your grant documents live elsewhere, you can upload or scan them in directly so you don’t have to manually enter every detail.
Ask Maeve any questions about the variables that impact when to exercise stock options, and get answers specific to your company and situation. Maeve can help you model and compare what happens if anything changes, including:
Your company’s 409A valuation
The taxable difference between your strike price and fair market value
The number of options that have vested
Your employment status and exercise deadline
Your available savings and financial priorities
The likelihood of an IPO, acquisition, tender offer or secondary sale
For illustrative purposes only. Actual results may vary and there is no guarantee of any particular outcome.
Secfi offers non-recourse financing to eligible employees at later stage startups who decide they want to exercise but don’t want to cover the full cost from personal savings. It can cover the strike price and associated taxes, so you can exercise without immediately selling shares. This lets you retain full ownership of the shares and potentially participate in more future upside.
Unlike a traditional personal loan:
There are no monthly repayments while you wait for liquidity.
Repayment is tied to qualifying future liquidity events, such as an IPO, acquisition or tender offers.
Your other personal assets aren’t used as collateral.
If there’s no qualifying exit, you generally don’t repay the financed amount.
If the company exits successfully, Secfi receives the amount financed plus the agreed fees and share of future proceeds.
Financing can be used alongside personal cash. For example, you might fund the amount you’re comfortable risking yourself and apply for financing for another eligible portion. Our equity strategists can help you find a mix that feels right for you.
Secfi’s Wealth team includes certified financial planners with experience answering questions like when to exercise stock options. You get a dedicated lead advisor and supporting team rather than explaining your stock options to a generalist who rarely works with private-company equity. We can also coordinate with your existing CPA or financial advisor.
Your Secfi advisor can take a wider view of how exercising may affect:
Emergency savings
Investment diversification
Starting your own business
Tax planning
A career change or break
Family and retirement goals
Our team helps you build a financial plan and investment strategy that accounts for your company stock alongside the rest of your portfolio. This is particularly useful when your salary and equity leave a major portion of your financial future tied to one company.
We also offer education for employees at your startup to help everyone make decisions that are aligned with their individual goals.
SpaceX’s 2026 IPO was the largest in history, so the numbers here are much bigger than most startup employees will face. Still, the underlying lesson applies at a smaller scale: as a company’s 409A valuation rises, the tax cost of exercising may rise with it. This example is illustrative only and doesn’t represent the outcome every employee or company should expect.
Secfi modelled a California SpaceX employee with 100,000 ISOs at a $4.40 strike price. Exercising in 2024, when the 409A valuation was $30, would have cost about $1.36 million, including roughly $924,000 in taxes. Waiting until 2026, when the 409A rose to $105, increased the estimated tax bill to more than $3.5 million, around $2.6 million more for the same shares.
For illustrative purposes only. Actual results may vary and there is no guarantee of any particular outcome.
Exercising earlier could have reduced the taxable difference and started the ISO holding period sooner, but it also would have required committing a large amount of cash while the shares were still private. Waiting provided more certainty, but at a much higher estimated tax cost. That’s why it helps to compare exercising at different stages with tools like Maeve.
If the employee instead received non-recourse financing in 2024, they may have been able to exercise earlier without committing the full cost in cash. They would have given up part of the future proceeds, but potentially avoided some of the extra tax created from the increased 409A valuation.
To read the full case study: The SpaceX IPO: What the average employee may have left on the table.
This case study is an illustration of our capabilities provided to an individual client. Client results may vary and there can be no guarantee of similar results. It is not known whether the client approves or disapproves of Secfi Advisory Limited or it affiliates as a whole.
The right time to exercise depends on many factors, but taking the time to figure out your situation could help you avoid an unpleasant tax surprise or missed opportunity for potentially life-changing money.
That’s why we’re proud to have completed more transactions than any other equity financing partner. We’ve provided over $790 million in equity funding to startup employees, and helped tens of thousands model their options.
Try Maeve to compare your exercise scenarios, or get in touch with our team for personalized support.
There’s no universal best time to exercise stock options. Exercising earlier may reduce the difference between your exercise price and the company’s fair market value, and it can start the holding period for potential long-term capital gains treatment on ISOs. However, you’ll commit your money sooner and take on the risk that the private shares may lose value or never become liquid.
The right timing depends on your option type, current 409A valuation, potential taxes, company outlook, exercise deadline, risk appetite and personal finances. Maeve, Secfi’s AI equity assistant, can help you model exercising now, later or in stages using your own grant information.
Employee stock options are a form of equity compensation that generally give you the right to buy company shares at a fixed exercise price. You usually can’t sell the options themselves, although you can exercise them and later sell the resulting shares through an IPO, tender offer, secondary sale or cashless exercise.
Exercising and holding may preserve more potential upside and offer tax advantages, but it requires upfront cash and exposes you to private-company risk. A cashless exercise lets you exercise and immediately sell enough or all of the shares to cover the costs, but it may result in higher taxes and fewer shares retained. Secfi’s team and our free equity assistant Maeve can help you compare the estimated costs, taxes and potential proceeds of different routes.
You can generally exercise stock options after they vest and before they expire. Some companies also allow early exercise, which lets you buy shares at the agreed exercise price before the options have vested, subject to the terms of your equity compensation plan.
Your timeline may change if you leave the company, are laid off or are terminated. Many plans provide a post-termination exercise window, often around 90 days for ISOs, although some companies offer longer periods. Always check your grant agreement because the deadline varies, and missing it could mean losing your vested options.
The $100,000 rule limits the value of incentive stock options that can first become exercisable in a single calendar year while retaining ISO tax treatment. The limit is based on the shares’ fair market value when the options were granted, not their value or exercise price when you exercise them.
For example, if ISOs covering $140,000 worth of shares first become exercisable in one year, based on their grant-date value, the portion above $100,000 is generally treated as non-qualified stock options. That portion may be subject to ordinary income tax when exercised. The rule affects the option classification, but it doesn’t mean you can only exercise $100,000 of stock options each year.
Maeve can help you identify your option types and model the potential tax implications, but a tax professional should confirm how the rule applies to your grant.